Lifetime gifts: avoiding complications

Parents often make gifts during their lifetime to their children. This might be to provide for the children by, for example, helping them to buy a home, or because the parents wish to try to reduce the inheritance tax (IHT) that would otherwise be payable on their estates.

A recent High Court case illustrates, however, that care is required when making gifts to avoid any disputes in the future.

The facts of the case

The case concerned the estate of the late Mr Richard Frost who died in 2008. Mr Frost had three children: Susan, Linda and Andrew. He had made a Will leaving 1/3 of his estate to each of his daughters, 1/6 to his son and 1/12 to each of his son’s two children.

Mr Frost was estranged from his son but both his daughters had been involved in his care, particularly after he developed cancer, after which he moved in with Linda and her husband.

Following the sale of his home for over £350,000, Mr Frost made gifts of £100,000 to each of his daughters, which was a sum approximate to the amounts they were due to receive under his will. After his death, a dispute arose as to the nature of the gifts to Linda and Susan.

The relevant law

The crucial question was whether the gifts amounted to “portions” i.e. a gift made during lifetime by a parent to a child intended to set up the child in life, or to make substantial provision for him or her. If the gifts were intended to be portions then, unless there was evidence to the contrary, it would be assumed that the gifts to his daughters were in substitution for the bequests to them in Mr Frost’s Will.

The decision

It was decided on the basis of the evidence available that Mr Frost had made the gifts to his daughters to compensate them for the care that they had provided to him and the ancillary expenses that they had incurred. As such the gifts were not portions and Susan and Linda were entitled to receive their respective 1/3 shares of the estate in addition to the lifetime gifts.

Conclusions to be drawn

This case shows that making lifetime gifts might not be entirely straightforward. In particular:

be clear about what is intended.This might necessitate changing your Will, for example, to make it clear that a lifetime gift is to be brought into account against the recipient’s share of the estate or leaving other written evidence as to intention.

take into account the IHT implications.Although a gift made at least seven years before death will reduce the IHT payable on your estate, if you die within seven years of the gift the recipient is primarily liable for any IHT due on the gift. If you wish the IHT on any failed gift to come from your estate then a provision in your Will to that effect is necessary.Lifetime gifts within seven years of death will use your IHT nil rate band in priority to your assets left on death so the implications of this also need consideration.

don’t forget capital gains tax (CGT).Although cash gifts, like those made by Mr Frost, have no CGT implications, gifts of other assets, such as shares and property, may trigger a charge to CGT. In some circumstances trusts can be used to help deal with this problem.

For advice on how to make a gift during your lifetime in a tax effective way, please contact a member of the private capital team.